I just returned from China for the second time in a little over a year and have yet been able to make sense of their domestic housing market. I am not talking about their must discussed housing bubble phenomenon or whether they have a housing bubble in the truest sense. I am talking about what seems to be a lack of a re-sale market.

After years of communist rule, the concept of home ownership in China is relatively new and appears to be in its early stages of development. Because growth in housing construction has been astronomical with all sorts of distorted metrics – their use of cement in 3 years (2011-2013) was more than the amount used in the U.S. over 100 years (1901-2000).

Housing accounted for at least 15% of GDP in 2015, down from 22% in 2013. This is why we are seeing large Chinese construction companies working all over the globe these days – due to oversupply of new housing in China. The opportunities for revenue growth at the same pace seems limited.

On the bullet train we rode from Bejing to Shanghai, there were high rises under construction on both sides of the train tracks for most of the 5.5 hour trip. It’s hard to comprehend how much construction is underway without seeing it first hand, but it is massive.

Ghost Cities v. Ghost Towns
Unlike ghost towns in the U.S. which are abandoned after the economic forces are no longer in play, ghost cities have never been occupied. I think this is a pretty obvious flaw of central planning. I learned that incentives play a big role in unnecessary construction. In order for provinces to receive income from the central state, they are encouraged to generate GDP. Construction of apartment buildings is a quick way to boost GDP but there didn’t seem to be concern about their eventual occupancy (a la, build it and they will come). Also since the government owns the land, developers pay ongoing fees for using it. Our tour guide said that there were at least 40 ghost cities in China although this study says there are less. Here is a map of known ghost cities:

Multiple generations pooling their equityHousing prices have been rising at about 17% annually for a decade – versus 11% disposable income growth of city dwellers. Rising prices have forced many buyers to pool the financial resources of as many as 3 generations of family. This shows how much is at stake for the Chinese government – if the housing bubble was to collapse. Yet same people I spoke with that expressed faith in the housing market showed grave concern over the integrity of their stock market. What alternative investments aside from housing does the typical domestic investor have? Especially since Chinese housing prices increased 53% in the past year?

However I am trying to get an answer for a much more basic point.

Is there a substantial Chinese re-sale market?
I feel way out on a limb when I say the following: few investors actually sell their apartments in the newly constructed apartment buildings.

I asked investors and real estate professionals in the Chinese housing market; four of our tour guides of the past few years; various people I met there during The Real Deal Shanghai conference: “Do investors sell their new apartments?” I consistently got a blank stare for a few moments as if the question had never come up before. A few people told me that buyers hold on to their investments for the long term and “no one sells.” On one of the real estate panels I moderated in Shanghai, a real estate professional made a comment that Chinese investors always prefer new.

U.S. re-sales (existing sales) have accounted for roughly 85% of total U.S. housing sales over the long run. Granted, China is new to the concept of home ownership so the re-sale market would not dominate housing sales like it does in the U.S. But without a vibrant re-sale market, the “value” derived from Chinese housing market indices tell us Chinese housing price trends must be almost exclusively based on the newest home construction sales prices and that equity is not tangible.

Home sales seem to be a one-way transaction. Investors that buy a home feel wealthier as their investment rises in value. Theoretically that gets them to go out and consume, i.e. the wealth effect. However the market share of consumer spending in China is roughly half the 60% market share seen in the U.S. so they have a long way to go. While the Chinese investor may enjoy rental income when an active rental market exists, domestic housing purchases seem to be driven by a long term equity play.

I have found no anecdotal evidence of the widespread selling of existing properties that were recently developed. There doesn’t seemed to be a tangible moment when the recent investor expects to cash out the equity realized on their purchase of several years ago. If this is an incorrect observation and there indeed is a vibrant and active re-sale market of newly constructed housing, I was unable to see one or be told of one by consumers and real estate investors who live there.

This video gives you a good sense of the excitement, if not frenzy in the residential development space in New York City. There was a long line of people waiting to enter the venue for the event when I arrived.

The Real Deal has posted the full video of the panel discussion I participated on last week with developers Steve Witkoff, Miki Naftali and Michael Stern. The Real Deal’s publisher Amir Korangy deftly kept the conversation going and candid, despite the technical challenges, sweltering heat and a heckler (i.e. just another day in NYC).

I’m not quite ready to use the word “haunted” in my housing language, but I had a nice chat with Brian Sullivan and Mandy Drury of CNBC TV’s ‘Street Signs’ – 30 Rock is always quick walk from my office to do the remote. Although my firm’s name was announced backwards on air (It’s really “Miller Samuel” I swear), I think my logic was forward (sorry).

As the above chart illustrates, the aggregate median housing price in New York City, based on co-op, condo and 1-3 family property sales, with and without Manhattan sales go their separate ways circa mid-2006, at the Case-Shiller Home Price Index peak of the national housing market. This also makes the decline in the New York Case Shiller HPI all that more maddening (because it’s not Manhattan, or co-ops or condos or new development and includes Long Island, Fairfield, Westchester, Northern New Jersey and a county in Pennsylvania).

During the boom through today, the shift in the mix towards Manhattan luxury property, largely from the combination of new development activity as well as vigorous Wall Street and international demand has expanded the difference between Manhattan and the rest of New York City. In other words, the gain in median sales price for NYC was caused by a shift in the mix toward higher end properties.

A recent post in CNN/Money featured Andy Warhol’s 1984 “U.S. Unemployment Rate. No Campbell Soup Cans but it feels strange to associate his art with economic data from the 1980s. It somehow works for me. One of the coolest property inspections I made was through “The Factory” years ago.

In 2007 the “Stand-up Economist” Yorman Bauman led the way with this much watched video on the difference between macro and micro economists. “Microeconomists are wrong about specific things while macroeconomists are wrong about things in general.” HI-larious.

“Economic data has become popular culture. While we used to think of it as being some kind of verified information only for people who are really knowledgeable about the economy, it’s popular culture now. You can talk to a taxi driver about it.”

While NYC has a taller residential housing stock than London but the premium per floor is similar. London shows a 1.5% increase in value per floor. My rule of thumb for Manhattan has been 1% to 1.5%, but closer to 1%. However we treat floor level as a different amenity than view and that’s probably the reason for the slightly larger adjustment in London. What’s particularly of interest is how much more the per floor cost of development is for higher floors:

Net to gross area ratios in tower schemes
are lower, since the percentage of space
taken up by the cores and service provision
areas are comparatively high. This means
that the effective revenue-generating
43% Uplift in construction costs per sq ft
between the 10th and 50th floor.

If you missed this show on TV, it is now available in its entirety online. It’s an excellent collaboration between WNET/THIRTEEN and The Real Deal on the noted architect. I loved the way the assemblage of development air rights – basically a high stakes secret chess match – was presented.

Note to self: ask Amir Korangy, TRD’s publisher to do a doc on me someday – it would be brief, boring and attract little interest, but hey, who wouldn’t want their own doc?

Treasures of New York: Building Stories reveals the private life and the creative process of Costas Kondylis [WNET/THIRTEEN]

Floor pricing has been the stumbling block for credibility with automated valuation models (appraisal replacement tools) used by banks and for services like Zillow. StreetEasy gets it right, in the way they display information – grouped by building so the patterns are apparent.

Matthew Strozier over at The Real Deal Magazine asked me to crunch apartment prices to show some sort of floor level relationship to value. I took the down and dirty approach (because SPSS is way over my head) and looked at all closed co-op and condo sales in 2009. I broke those sales down by floor level and crunched the metrics for each floor. The results are seen in this very cool chart. Click on the graphic to the right that TRD created to open the big version.

First Column – % share of units on that floor compared to all sales in 2009

Second Column – floor level

Third Column – Average Price per Square Foot of all sales in 2009 on that specific floor.

Periodically I receive insight from people that have spent a lot of time analyzing specific market trends or attributes. In this case, here’s a fascinating analysis about the views in DUMBO by one of its residents. – Jonathan Miller

A Tale of Two Views
April 2010
Anonymous

Introduction
DUMBO. Down Under The Manhattan Bridge Overpass – arguably one of the most hyped neighborhoods of the aughts. I thought I would take a stab at analyzing some of the real estate in the area. It’s always interesting when market reports and news stories quote a price per square foot or median price for an entire neighborhood. I believe that these numbers are not very useful because even within a neighborhood as small as DUMBO, there are still micro markets that exist based on apartment features. Though DUMBO is a cultural and business center, is safe, family friendly, and has access to shops/restaurants/parks/transportation, the main attraction to real estate in the area is for the world class views. There are really two markets cohabitating in the DUBMO market – one for apartments with “wow factor” views, and one for apartments that do not contain them. The existence of two separate markets will be empirically proved and explored in this paper.

The goals for this analysis are 4 fold:
1) Visually display the existence of the two separate markets in DUMBO
2) Quantify $/PSF value for apartments with “wow factor” views vs those that don’t
3) Assess the effectiveness of an actual DUMBO appraisal
4) Discuss the pricing of apartments currently on the market

Data and Definitions
The area is actually incredibly small with only a few buildings and I chose to look at the two flagships – 1 Main Street (The Clocktower) and 30 Main Street (The Sweeney Building). Both buildings are well established door men condos with views. Other buildings in the area do have views – but I chose not to look at others such as 100 Jay and 85 Adams are new construction, and 70 Washington runs the risk of views being obstructed by the Dock Street development. From 2003-present there were 195 sales in these 2 buildings representing approximately 240 million dollars in value, a large enough sample size for this analysis. The penthouse sale at 1 Main, Cabanas at 30 Main, and one outlier at 30 Main (apt 7G on 9/14/9) were excluded from the analysis

The views I define as “wow factor” contain large windows that have full unobstructed views of the East River + Manhattan Bridge or East River + Brooklyn Bridge + Downtown Manhattan. More specifically these are:
1 Main – Any B, C, D line apartment or an A, J, K, L apartment above floor 4.
30 Main – G, H, A, B apartments above floor 5

All sale price information was taken from ACRIS and square footage sizes were taken from the condo offering plans. It’s important to note that the sale dates represent CLOSING dates – meaning that there can be some noise in the data depending on how long each apartment was in contract. 40 of the sales contain contract date data available from StreetEasy, where the average days between contract and close at 73 days.

Visual Display
The blue line in the graph below represents the average value price per square foot paid quarter by quarter for apartments that have spectacular views. The red line represents the PSF sale price those that do not. Along the X axis is time and the Y axis is dollars paid per square foot ($/PSF).

You can see that over time there is a clear gap between the blue line and the red line (Aside from Q3 2004). This gap represents the higher value of apartments with spectacular views. Furthermore, since 2005 the red line remains fairly constant with a band around 700-800 $/PSF, while the blue line spikes and dips with the market.
It’s important to highlight again that the closing price data comes from ACRIS, which means that the dates are closing dates – NOT the dates each contract was signed.

More recent data – zoom on the chart from 2005-Present

Quantification
Here is the same data in table format. You can clearly see the # of sales, total dollar value of sales per quarter, and weighted $/PSF for each quarter. It’s also interesting to note that though there were 42 more sales of non spectacular view apartments the total $ value is only 6mm more. The final takeaway from the chart is that that the average weighted $PSF difference for the entire timeline is ~$268 PSF.

To extrapolate the $268 PSF into more real terms – we are saying that having two apartments of the same size, one with a view would cost $1,000,000 while one without would cost $732,000. The calculation methodology for PSF calculations were weighted by total square foot. For example, if a 3000 sq ft apartment sold for 1000 psf and a 1000 sq ft apartment sold for 2000 a foot, the avg for that quarter would be 1250. 4000 total sq ft sold – 3000/4000 = .75, 1000/4000 = .25, (.75 * 1000) + (.25 * 2000) = 1250.

Assuming a 20% down payment and 5.5% 30 year fixed mortgage the payments would also work out as follows:

So we have a difference in monthly payment of $1,217 per million dollars of apartment value, and an annual amount of $14,604 per year.

So when you see a graphic like below that suggests the median price in DUMBO is $1.24 million, you know that value per square foot within that median price is drastically different depending on if the apartment has a spectacular view vs. not.

Appraisal
I got my hands on an actual appraisal for a unit that has a “wow factor” view – and looked at the comps. The first thought is to look at the comps themselves. Understandably, it is very difficult to find true comps considering real estate is such an illiquid asset, but I have highlighted in red the major issue as to why each particular comp loses validity – lets work from the bottom up. If you are buying at 1 Main or 30 Main, you are most likely not considering 360 Furman Street (1 Brooklyn Bridge Park). This is like comparing the Upper West Side and Hells Kitchen – though close in distance, they are just totally different neighborhoods that appeal to different clientele. The Next 3 – 30 Main/7C, 1 Main/5E, and 1 Main/2K – don’t have spectacular views. As we showed in the above chart, there is a significant difference in value when the view is not present and should not be compared. Lastly, though 1 Main/12K could be considered a comparable – I don’t see how it makes sense to compare a sale in 2010 to one that was signed before the Lehman collapse.

Appraisers take these differences into account and thus make adjustments to true up the values of the apartments. In this case, adjustments were made for date of sale, maintenance costs, floor, view, age of building, bathroom count, size in square feet, outdoor space, common roof deck, and garage. Here is a snippet of those adjustments:

If you refer back to my chart above you can see the total appraised PSF of each apartment as well ad the contribution to Total PSF for each adjustment. I’ve left the sign (+/-) off the view/floor and time adjustments, but you can assume that they are positive for the apartments that do not have “wow factor” views. You can see that the View/Floor and Time adjustments are no where near where they need to be compared to the empirical finding

In summary, this appraisal does not take into accounts the severity of difference in price that comes from the nuances of view or timing accurately. More proof that appraisers need in depth local knowledge of the properties they are assessing in order to be able to compare apples to apples.

Current Listings
There are currently 11 units for sale between 1 Main and 30 Main, more important than location, there are 4 with spectacular views and 7 without. The chart below shows those listings and is sorted by price per square foot – looks like the sellers are aware of the bifurcated market as well.

Below is the post Lehman/Financial collapse price per square foot for the area.

You can see that the average for the last 5 quarters comes out to approximately 1118 $/PSF for apartments with views and 766 $/PSF for apartments that lack. We also see that the there is a significant upward trend in the spectacular view apartments where 3 units sold in Q1 of 2010 at a size weighted average of 1224 $/PSF.

Per our earlier analysis with the appraisal – there are nuances to the way these apartments are priced. 1 Main/5D is priced at 1695 $/PSF due to extensive renovations. 1 Main/6GH is commanding a premium due to its size (3bed) as well as renovations.

View Apartments: Considering the current listings are either below 1118 $/PSF or very close to the latest quarter’s $/PSF (1224), the data suggests that all apartments with views aside from 5D are accurately priced.

Non View: We also see that all apartments that lack spectacular views aside from 30 Main/4F are overpriced as they are over the 766 $/PSF recent average and the data does not suggest any upward trend at the moment.

Conclusion
It’s important to disclose that this analysis is measuring the value of space within the DUMBO area, and assumes that buyers are solely looking at apartments within this area. It highlights how even within two buildings there are many nuances and generalizing apartments across neighborhoods is a very difficult and complex task.

Through analyzing historic closing sale information it is clearly visible that there are two separate markets in existence in DUMBO. Refining the data suggests that the price differential between the two markets is ~268 $/PSF. Even within the same building there are significant factors that create a drastic difference in value, and breaking down into monthly mortgage payments the price differential for apartments with views vs those that don’t works about to ~$14,600 annually for a $1 million apartment.

This analysis has also shown that appraising a property is an extremely difficult task that requires an immense amount of local knowledge and building/apartment features.

Lastly, the current listings in the markets for apartments with views are priced in line with historic $/PSF as well as recent trends. 30 Main/9A happens to be the writer’s personal favorite and the one I would bet sells next. The data suggests that apartments that do not have spectacular views appear to be overpriced.

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About Jonathan Miller

Jonathan Miller is President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm he co-founded in 1986. He is a state-certified real estate appraiser in New York and Connecticut, performing court testimony as an expert witness in various local, state and federal courts. He holds the Counselors of Real Estate (CRE) and Certified Relocation Professional (CRP) designations. He is an Appraiser “A” Member of the Real Estate Board of New York and a member of Relocation Appraisers and Consultants, Inc.Learn More...

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